Posted on February 26, 2017 by David Haggith
The Great Recession
As we enter 2017, housing bubbles are showing signs of bursting all over the world. I know I’ve been promising I would lay out the economic headwinds for 2017, but 2017’s headwinds are building so fast and furious that I’m having to break that promised article out into several articles, as I’m accumulating material faster than I have time to cover.
I’m going to start with the housing bubbles that are now extremely evident in the US, Canada and Australia, noting that housing is also insane in its own weird way in China again and in many other parts of the world. The point I want to make is that, with housing bubbles now at the peak of popping in several parts of the world, this coming housing market collapse could make the US housing market crash of 2007-2009 look like the warm-up act, and housing is just one area of the global economy that is showing signs of high peril.
A 2017 housing bubble collapse in the US may be in the cards
As I wrote in “The Inevitability of Economic Collapse,” the whole US economy is a house of cards, but particularly the US housing economy where we have done everything we possibly can to pile up a potential housing collapse as precariously as we did last time around just so we can watch it all fall down again.
The hard push to get back to where we were in 2006 has been on for about seven years. In the past few months, housing has been on its fastest tear in the US with the number of new permits being issued for construction in 2017 particularly leaping up like a spring lamb, and that’s with prices that are now generally higher than they were at their peak in 2006. We are showing all the same evidence of an irrational market that we showed going into the Great Recession:
That peak was only attained because of lax credit, which made an expanding number of purchases possible after prices went beyond what people could afford. Since wages in real terms (having only recently started to rise in a few industries) are not any better than they were back in the housing crash of ’07-’09 , today’s higher prices are actually less sustainable without dangerously lax loan terms than they were back then.
That’s why we have again begun to relax loan terms for individuals buying a house. For the last eleven quarters, more lenders have relaxed mortgage standards than have tightened them. (“Minimum credit scores have dropped. Self-employment documentation has reduced. Maximum loan-to-values have been increased.”) On top of what banks are doing to relax their own self-imposed standards, Trump has ordered a review of Dodd-Frank with the hope of stripping it back in order to get banks to issue more loans in order to juice the economy (and to make things better for his real estate industry). We learn nothing.
Cohn said Friday on Fox Business that the executive orders are intended to relieve restrictions and scrutiny that post-crisis regulations have put on banks…. Trump promised to do “a big number” on the Dodd-Frank Act. (Bloomberg)
What could be better than a return to the exuberant days of banking deregulation? A Republican article of faith says that banks and the economy can always benefit from further deregulation. Dodd-Frank will be stripped down before it fully goes into practice. The unstated goal here is to fatten up some more bankers and further inflate the housing bubble because we are so incapable of thinking outside of a housing-based economic model.
The fact is that bank loans to businesses have never been higher (in total value of loans issued), so there is no problem, as Trump claims there is, of banks not issuing enough loans to businesses. The value of bank loans issued was not even this high just before the Great Recession. Likewise, the total value of bank loans for commercial real estate has never been anywhere near as high as it is right now. So, most likely those who are not being given loans (like perhaps the King of Bankruptcy) probably don’t deserve them.
For now, the race to the top in housing is still on, but there are signs that a peak is being reached. I’ referring to signs other than just the fact that we’ve passed the previous peak’s prices. January purchases of existing homes picked up to a pace not seen since 2007. The number of new-home sales jumped 3.7% in one month (in terms of number of units sold). That is in spite of the fact that the median price of a US home has risen 7.1% since the same time last year.
One caveat about this rise (until we see where it goes in the next couple of months) is that some of this activity since December’s rate hike may be due to people rushing to buy before interest rates rise even more, now that rate increases by the Federal Reserve are looking certain.
With houses in the US now remaining on the market for only fifty days, averaged across the nation (less than a month on the west coast), the market is feeling as searingly hot as it did in 2006 just before prices started to fall. So, that’s one indicator a top may be near.
Because of a shortage of inventory (the lowest number of houses on the market since 1999), bidding wars are starting again in cities like Seattle and San Francisco where houses again regularly sell for more than their list price. That kind of bubbling-over race to higher prices ran for a few years in the highest-priced markets before the last housing crash, but it is the kind of frenzy that defines “irrational exuberance” in a housing market. When people scurry to say, “I want to pay you more than you’re asking for” in a market already priced higher than ever before, you’re witnessing the kind of mania that precedes a crash. So, that’s another indicator that a top may be near.
One more kind of action that has risen back to pre-Great-Recession levels is house flipping. Foreclosures are being snapped up by mom-and-pop fixer-uppers at a level matching the superheated speculation of the last housing bubble.
Some US housing bubbles appear to be popping already. Prices on expensive homes in some places, such as Miami, are now falling quickly. Since early 2016, condo speculators in Miami (who buy condos pre-construction, hoping to sell them for a better price as soon as they are completed) have been pummeled into accepting losses. Inventory is growing in Miami; sales volume is shrinking; and total volume of sales in dollars is declining.
Same kind thing is happening in Manhattan where luxury co-op apartment contracts have collapsed 25%. Closings on high-end sales in Manhattan (number of units sold) had fallen 18.6% year on year back in October. Inventory of units in new developments was backed up at that point an additional 27.2% YoY.
Barry Sternlich, CEO of the Starwood Property Trust, which finances real estate development, calls Manhattan’s luxury condo situation “a catastrophe” that “will get worse.” Since homes in this segment of the market are typically bought by those people who make a lot of money by working on Wall Street, one has to wonder what this says about the real situation in the world of stocks and finance.
From 2017 on, the US housing market will face different kind of bubble bust than it has ever faced before. The baby-boom bubble is now moving out of the housing market. For the next two decades, the fastest rising segment of the population will be those who are seventy or more years old, while those who range from twenty to sixty nine (where homes are still being bought) will shrink in total numbers.
Seventy-plussers, whose total population is projected to quadruple during that time, buy the lowest number of homes of any age group (only about seven percent of the market). Not only do they have less need of a new home, there aren’t many banks that want to issue a thirty-year mortgage to someone who will be a hundred years old by the house it gets paid off. So, ask yourself who is going to buy up all the houses that the baby boomers evacuate when they move into retirement facilities? (The growth in nursing facilities, may keep construction going, but it isn’t going to help banks with huge numbers of home loans on their books, and boomers trying to sell in that market will be hurt badly by falling values, making it also hard to buy into retirement facilities.)
Why the real-estate mogul president of the US may cause the housing bubble to collapse in 2017
It seems counter-intuitive that a real-estate development tycoon would cause a housing bubble collapse, as there is nothing he would hate more, but consider the following:
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